“Catching Up” On Debt Payments In Chapter 13 Bankruptcy

The main benefit of Chapter 13 bankruptcy is that it allows a debtor to keep their assets while catching up on their debt payments.

How Certain Debts Are Treated During Bankruptcy

Below is a list of how certain debt payments and assets are treated over the course of Chapter 13 bankruptcy:

Credit Cards

While credit card debt is paid off either in full or partially over the three to five year period in Chapter 13 bankruptcy, a debtor is not allowed to keep their credit cards. Once the bankruptcy is filed, the debtor no longer has access to their credit card account.  When their bankruptcy repayment plan is approved, they are responsible for paying off the credit cards as set out in their repayment plan.  Upon discharge of their bankruptcy case, the debtor may consider getting a secured credit card to rebuild their credit history.  It’s important to note, that although a bankruptcy debtor cannot keep their credit card, they can keep the property they purchased with their credit card.

Car Loans

The obligation to repay a car loan in Chapter 13 bankruptcy is dependent upon whether or not the debtor surrenders the vehicle to the creditor. If the debtor surrenders the vehicle to the creditor in bankruptcy, they are freed from their car loan obligations. Even if the creditor auctions off the vehicle and the sale price doesn’t cover the original loan, the deficiency balance is discharged in bankruptcy. On the other hand, if the debtor wants to keep their vehicle in Chapter 13 bankruptcy, they must come up with a plan to not only pay the regular monthly payments as set out in the car loan agreement, but they must cure any arrearages. As long as the debtor earns enough income they can cure an arrearage over the course of their Chapter 13 bankruptcy while making regular monthly payments.  One caveat is that the arrearage cannot extend beyond the Chapter 13 bankruptcy timeframe. This means that if a debtor owes $15,000 in delinquent car loan payments, all of that must be repaid in 3 to 5 years.

Sometimes, if the car loan is more than the actual value of the vehicle, the bankruptcy court will “cram down” the amount owed, effectively lowering the debtor’s loan balance and monthly loan payments.

Mortgage Loan

Similar to the car loan, the obligation to pay a mortgage in Chapter 13 bankruptcy is dependent on a debtor’s willingness to surrender their property. If the debtor agrees to return the home to the creditor during bankruptcy, the can discharge their obligation to pay the mortgage debt. However, if they want to keep the home in bankruptcy, they must pay off any delinquent mortgage payments over the life of the plan and they must make regular monthly payments as agreed to in their original mortgage loan agreement.

Under certain circumstances, the bankruptcy trustee may “cram down” a secondary mortgage if it exceeds the value of the home.  This is something an experienced bankruptcy attorney will need to fight for during the bankruptcy case.